An all-equity firm has expected earnings of $14,200 and a market value of $82,271.The firm is planning to issue $15,000 of debt at 6.3 percent interest and use the proceeds to repurchase shares at their current market value.Ignore taxes.What will be the cost of equity after the repurchase?
A)17.99%
B)18.08%
C)19.70%
D)18.97%
E)19.55%

Question

Quizplus · Accepted Answer

R₀ = $14,200 / $82,271 = 0.1726 R_s = 0.1726 + [$15,000 / ($82,271 - 15,000)](0.1726 - 0.063) R_s = 0.1970,or 19.70%

An All-Equity Firm Has Expected Earnings of $14,200 and a Market